NAFCU Seeking Stronger Penalties for Strategic Defaults

NAFCU wants the Federal Housing Administration to come down harder on consumers who walk away from a mortgage commitment even though they would be able to make their mortgage payments.

The practice has become known as “strategic default” on housing loans and housing experts say they have come to represent a significant numbers of foreclosure cases each year. Consumers generally strategically default on mortgage loans where they believe they will never be able to recover their loan value.

NAFCU has sent a letter to the chairman and ranking member of the House Financial Services Subcommittee on Insurance, Housing and Community Opportunity in advance of an oversight hearing on the U.S. Department of Housing and Urban Development on Tuesday.

In its Feb. 27 letter, NAFCU pointed out that the FHA's policy on strategic default and that of Fannie Mae are not equivalent, with the FHA's carrying the lesser penalty.

“As you may know, under FHA’s current policy, persons who strategically default on their mortgage will not be able to obtain another FHA loan for a minimum of three years,” NAFCU wrote. “Comparatively, Fannie Mae has instituted a policy that prohibits a borrower that has strategically defaulted from obtaining a Fannie-backed mortgage for seven years. The consequence of FHA’s shorter three-year lockout period, among other things, is that a borrower with a GSE-backed loan can strategically default on their loan and then after three years can obtain a FHA loan.”

This discrepancy fails to provide real incentives against strategic default and risks making FHA the loan of choice among borrowers who failed to meet their previous obligations, NAFCU wrote, adding “[c]onsidering the subcommittee’s concerns about the solvency of the FHA, ensuring the FHA is not propped up as a safe haven for those who strategically defaulted on previous mortgages, is a critical part of the safety and soundness conversation.”

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Another part of the problem is that we are en-masse erroneously mis-labeling short sellers as strategic defaulters, with little regard to hardship. From the outside, many of these underwater homeowners APPEAR to...